FANCY A BIT OF THAT?
Cryptocurrencies took the financial world by storm in 2017 but their rapid rise saw an even more dramatic fall. Alun Palmer reports on what the future holds for the likes of Bitcoin?
To investors, the humble tulip can provide a cautionary tale. Last year saw an explosion in the rise of cryptocurrencies, encrypted digital ‘money’ that operates outside traditional central banks.
One Bitcoin, the most popular cryptocurrency created in 2009, was worth $800 at the beginning of last year. By mid December it was worth $17,900 then two months later its price had plummeted to $6,200, a drop of 65 per cent.
It made a lot of early adopters seriously rich yet many who were swept up in the mania bought at its peak, suffering substantial losses.
Cryptocurrency evangelists say it is still on course for strong and steady growth.
Others, however, hark back to the humble tulip.
The flower was introduced into Holland from the Ottoman Empire in the late 16th century and its intense colours were unlike anything then available.
The blooms quickly became a luxury item and no successful gentleman could be seen without them.
The world’s first futures market was created when traders signed a contract before a notary promising to buy tulips from growers at the end of the season.
By the 17th century one bulb cost as much as a house and investors were trading their land and life savings to buy more bulbs. In one month tulips enjoyed a twenty-fold increase in value and one farmer traded 12 acres of land for just one bulb.
But in February 1637 reality set in and the price crashed leaving many
So is Bitcoin and other cryptocurrencies the 21st century equivalent of the tulip
bulb and another disastrous bubble waiting to burst?
Bitcoin was created in 2009 by Satoshi Nakamoto, an alias used person or
The payment system was designed to be borderless and free from central government control. Users would interact directly and all interactions would be logged on a vast public register known as the blockchain.
To get a Bitcoin you have to start mining, a process where you set your computer to solve a difficult mathematical problem with a 64 digit solution.
Dutch bank ING worked out that to mine one Bitcoin would cost the same amount of electricity as powering a home for a month.
The bulk of Bitcoin mining is done in China where energy costs are lower.
At the moment there are 16 million in existence and just 21 million can ever be created by miners.
At the heart of cryptocurrencies are their anonymity. Not surprisingly, the ability to trade vast sums of money without trace has made it the first stop for dodgy oligarchs, criminals and money launderers.
It has also set up a new market for entrepreneurs willing to cash in on the cryptocurrency millionaires who have found it tricky to buy super yachts with their virtual money.
Eleesa Dadiani, 29, is a member of the Georgian nobility turned cryptocurrency evangelist who can turn your Bitcoins into a Ferrari or gold plated swimming pool.
The crypto super rich fly in from around the world to her London company Dadiani Fine Art in Mayfair which last year became the first gallery in the UK to accept cryptocurrency as a method of payment.
She said: “We serve as a conduit between a new source of wealth and old world dealerships that don’t, by default, accept
“It is stateless. It is universal, if you like, because anybody with an internet connection can participate in this economy.”
The major world currencies, such as the pound or euro, are what is called fiat currency, which is backed by the government that declares it legal. It is not backed by a commodity, such as gold or silver.
When using fiat currency, it is possible to pay by cash or card; however, when using a cryptocurrency to buy something, such as Bitcoin, there is no physical counterpart.
One reason Dadiani announced last year that her gallery would accept cryptocurrency was because she identified a problem in the crypto economy. One of the main problems of the crypto economy is that whatever holdings or wealth a person has, is for the most part, locked into this alternative economy.
“You are rich on paper. You are rich locked into this economy,” says Dadiani, “I understood that this will be a problem, so there have to be businesses that are functioning within the realm of the crypto economy, who are willing to accept your cryptocurrency.
“Cryptocurrency has to be, at that point, real currency because it is traded for real goods and services.”
But is this another bubble or does the future look rosy for investors?
In February several UK financial institutions banned the use of their credit cards for buying Bitcoin, not a great vote of confidence in the online currency.
Agustín Carstens, general manager at the Bank for International Settlements, the talking shop for top central bankers and regulators, added to the gloom.
In a speech in Frankfurt he said: “While perhaps intended as an alternative payment system with no government involvement, it has become a combination of a bubble, a Ponzi scheme and an environmental disaster.
“The volatility of Bitcoin renders it a poor means of payment and a crazy way to store value.”
History has yet to decide whether Bitcoin and its like will go the same way as the tulip.
Some believe it will flower spectacularly while others think it will wither and die. Not even the experts can agree.